American CEOs aren't the best option

Until recently, an Israeli company had to hire an American CEO in order to be successful. The magic has since dissipated, and it turns out that with one exception, no Nasdaq-listed Israeli companies have American CEOs.

What time is it over there? Seven in the evening on Thursday? Thats the beginning of the weekend; why are you calling me? XACCT Technologies CEO Eric Gries scolded. It was 9:00 am in California, where he was. (I was calling from Israel). Gries was long since gotten used to taking the time difference into account when calling XACCTs branch in Israel, or its other offices in Europe and Asia. Round the clock, at XACCT, someone, somewhere in the world, wants to talk to me, says Gries.

The time differencesare apparently only one of the problems facing an American CEO of an Israeli company. For years, Israeli start-ups followed the mantra that equipping themselves with an American CEO was the formula for success, but now the Americans are suddenly no longer in demand. American CEOs are now out of style, and no venture capital fund, headhunter or entrepreneur is really interested in choosing this path any more.

Israeli companies hired a parade of American CEOs in recent years, but this type of executive is now an endangered species. Everyone I asked about the subject said I should talk to Gries or DealTime president and CEO Dan Ciporin. A long pause would then ensue; no-one could think of another American CEO leading a successful Israeli company.

Less than a panacea

Apax Partners Ventures (Israel) partner Allan Barkat will not be caught investing in an Israeli company with an American CEO, unlessthe CEO is working closely with an Israeli founder or dominant manager.

Is an American CEO the panacea? We're slowly reverting to the proper model of experienced Israeli managers, Barkat says. There may well be an exception or two, but most Israeli success stories are based on Israeli managers, either in Israel or the US, alone or together with an American CEO. I would bet that virtually every venture capital fund manager who takes a hard look at his portfolio will realize that [an American CEO] is the reason for over half the failures. I won't invest in such companies. We're in the success business, not the failure business, says Barkat.

Barkats gut feeling,whichis identical to those of other Israeli venture capitalists, recently received empirical support from research conducted by Avner Halperin, a graduate of the Talpiyot program, and some Israeli start-ups, including Rad-Bynet subsidiary Radcom (Nasdaq: RDCM). Halperins thesis at the MIT Sloan School of Management examined the role of American CEOs in Israeli companies.

After interviewing scores of start-up employees in offices in Israel and the US, sitting down with venture capital fund managers, and reviewing the 90 Israeli companies listed on Nasdaq, Halperin concluded unequivocally that employing an American CEO in an Israeli company was a recipe for failure. Halperin found that none of the Israeli companies that were floated on Nasdaq was led by an American CEO, and that virtually every Yankee CEO who had been hired by these companies was fired.

The exception was Netect, which was founded by three Israelis and subsequently managed by Paul Blondin, former Cascade Communications Corp. president and CEO. Netect, which developed a series of communications network security products, was sold in 1999 to a US software company for $35 million in a share-swap deal.

There are cultural differences, and there are time differences, says Halperin about his findings, but there are also more important and less well-known reasons (for the failures). For example, entrepreneurs who start companies don't know how to pick CEOs. Americans are superb interviewees. They learn the technique from the cradle, and can make an impression that's unjustified. Furthermore, when an Israeli calls up another American to get a recommendation, he doesn't know that they won't speak badly of the interviewee, for fear of a lawsuit. There are very sophisticated codes to respond to requests for recommendations. If you're asked about an individual, and want to say he's no good, wait quietly for ten seconds, and then say, excellent. The questioner will have to understand the latent, implied caution."

Another crucial factor is that Israeli start-ups, even in good times, only have access to second-class American managers. They're unattractive for American managers, and if the managers have the opportunity to be the CEO of a comparable US start-up, they'll opt for it. I think that some of them would prefer being unemployed to flying to Israel. Some are enthusiastic about the international connection, and love foreign languages, foreign travel, and adventure. Their previous jobs were often in foreign companies and they're attracted to Israeli start-ups. But such people are a minority.

No more fools or wise men

Gemini Israel Funds managing partner Yossi Sela has not conducted any research, but concurs absolutely with Halperin's findings. I believe in the Groucho Marx axiom that I wouldn't want to belong to any club that would have me as a member. Since there are a thousand and one reasons why an Israeli company would be less attractive than a US company across the street, first-rate American CEOs will not join them. The exceptions are Israelis residing in the US, and weve had excellent experiences with them. But when Silicon Valley suffered a severe lack of hundreds of managers, we had no chance of competing in any reasonable manner, and the solution was to transfer the entrepreneur there or hire a second-rate manager."

Two years ago, at the height of the boom, I was at a conference where everyone talked about howto hire American CEOs. I asked the forum how many Israeli companies with American CEOs hadfloated shares on Nasdaq. The answer was simple: zero. Itell my companies that when they go head-hunting, they should make a two-for-the-price-of-one deal, so that after they fire the first CEO, they have another one ready for the same money.

Sela notes another problem. When we sit down with an Israeli candidate for a CEO position, we can check where he grew up and with whom he played in the sand-box, because our pond is small. We have a problem analyzing American managers. The worst of them know how to sell themselves,and we have trouble peeling off the mask of corporate America and all its jargon. In Israel, we need the assistance of our US partners, but here too, the rate of success isn't dramatic. During the boom years, several losers were hired as CEOs, and the companies regretted it. We're no dumber or wiser than anyone else.

From this perspective, Gemini concluded it needed an insider as its representative in Silicon Valley, and sent Tali Aben, instead of hiring a local hot-shot. It wasn't even a matter of discussion, says Sela. In order to be taken seriously, we covered all the alternatives. The idea of hiring an American to be our representative in Silicon Valleycould be defined as a second idea there was a second between the time that the ideawas raised andsubsequently dropped.

Sela nevertheless claims that the rules may have changed slightly since then. Groucho Marxs axiom may not be so relevant any more. Demand has fallen dramatically, and companies in the technological forefront may now be able to recruit first-rate [American] CEOs, says Sela,even though everyone says this is a recipe for failure.

I think it's quite silly to assert that American CEOs are bad. I reject such arrogance. We have things to learn. It's simply a matter of supply and demand, and that worked against us in the past, but now first-rate companies have good recruitment opportunities in the US, concludes Sela.

An American CEO cannotbe leftalone

In contrast to Sela, who has some reservations, Barkat is much more insistent. There's a theory that claims that Israel lacks talented and experienced managers, which led to the perspective that argued that development should be done in Israel,and an American should be hiredto fill the roles of CEO and messiah."

I looked at our 32 portfolio companies, and checked which had failed. For example, we had a company called I-Scraper that went bankrupt, and others that failed to take off. I noticed a correlation: all the failed companies had American CEOs. I then looked at the funds successes in Israel and the US companies such as Commtouch (Nasdaq: CTCH), Compugen (Nasdaq: CGEN), Fundtech (Nasdaq: FNDT ), and found they all had an Israeli, based in Israel or the US, in their management teams. I also looked at Nasdaq-listed Israeli companies, and didn't find any that had a US-based, American CEO who was not accompanied by the Israeli founder. The findings unequivocally contradicted the theory that US aid was essential.

After his opinion was reinforced by his friends at Israeli funds and colleagues in Apax Europe, Barkat formulated four models for the proper management of Israeli start-ups. The first model is a company managed by an experienced Israeli, who is located in Israel and spends a lot of time in the air. Barkatlists some of the best and brightestIsraeli high-tech companies that have used this model: AudioCodes (Nasdaq: AUDC), NICE-Systems (Nasdaq: NICE), Amdocs (NYSE: DOX), and Indigo NV (Nasdaq: INDG). Most of them established overseas marketing companies or branches, and recruited local managers for them, while keeping the experienced headquarters managers in Israel.

The second modelconsists of Israeli companies whose experienced Israeli manager resides in the US. Here too, thenames form awhos-who list of Israeli high tech professionals : Davidi Gilo, Efi Arazi, Kobi Alexander, Gideon Mandel, and others. Barkat says theirsuccess hints at the quality of the model.

The third modelconsists of an American CEO supported by an Israeli manager in the US. His title is irrelevant, says Barkat. They work together, and the Israeli uses informal channelsto translate the cultural differences. I can give an example from my personal experience. I once was DSP Group (Nasdaq: DSPG ) manager in Japan. At my departure party, it was said that Allan is a good guy, talks straight, but remember that in Japan his intelligence and wisdom are only one part of the equation. That was the key sentence. Common language, common basic values, and prior acquaintanceship kept the relationship together. It allows the development of dialogue and problem-solving.

The fourth model, which Barkat presents as the failure, is an American CEO on his own. Two examples from Apaxs portfolio serve as examples: I-Scraper and Jerusalem-based One-Path Networks, whose imported American CEO was declared to be a dismal failure. It isn'ta problem that the companys center of gravity is in Israel. The problem was that he needed a cultural interpreter. We're talking about young companies that have their technological centers in Israel and bring in an American manager. However much he tries, he won't understand the culture."

Ill give another example from Japan. We had a major project with Sanyo, and the development manager in Israel was called up for reserve duty in the army. His staff forgot to carry out a demo test before sending the product to Japan. Three months later, lo and behold!, a new product version was released that alsodidn't include the demo test. What did the Japanese manager tell me? Boaz-san is again in the army. That was the mentality Israelis always have an excuse.

Globes: Is the wave of criticism of American CEOs a kind of post-mortem?

Barkat: One companys success or failure isn't an indication, but when there are several, a pattern emerges. If you would have asked me two years ago, I might have said the same thing, but intuitively. Then too, there was a lot of money, and money covers a multitude of sins. After all, an American manager, especially if hewas a vice president at Lucent or Nortel, is used to high expenditures. When there was money, a company could raise $20 million and burn $1.5 million a month. Then when it's suddenly impossible to raise more money, you start examining why you were burning $1.5 million a month, rather than $400,000.

No longer running on auto-pilot

Israel Seed general partners Michael Eisenberg and Jonathan Medved offer a somewhat more optimistic approach about the chances of success for an American CEO of an Israeli start-up. Their American background and willingness to accompany the new CEO, as well as the fact thattheir position as seed investors forces them to become more deeply involved in their portfolio companies, may explain why they believein thepotential of American CEOs, even though others view them as nearly certain failures.

In 1997, after joining Israel Seed Partners, Eisenberg concluded that the absence of a strong managerial foundation in Israel required the hiring of American managers, because they were simply better. That was the approach then, he remembers. We hired CEOs, and the system worked. You no longer have to automatically hire an American CEO. There are several cases where it's possible to hire an Israeli CEO. There are an increasing number of Israeli entrepreneurswho can be CEOs, and their managerial capabilitieshave improved.

In 1997, all self-respecting companies went to the US market. Now they think about Europe, and Israeli culture is much closer to Europes than Americas. Under the present circumstances, it's harder to hire a manager for an early stage company, due to the economic climate.

Eisenberg comments on another business cultural factor. An American CEO hired by an Israeli company has to understand that on the first day he's also a secretary, CEO, marketing manager and floor-sweeper. That's how it is for the first employee. The isolation helps, and draws them closer to the Israelis, because there's no-one else to talk to, he concludes.

Medved, Eisenbergs other half at Israel Seed Partners, managed to get a word in before leaving for another hectic business trip. I think it's worthwhile to hire American CEOs as quickly as possible, and it's not easy to convince them to join a fresh start-up. We managed to recruit several wonderful CEOs, and the companies would not have succeeded without them or their relationships with the founders. These are special people, who can handle the cultural differences.

Havent you been burned by bad CEOs?

Medved: Yes, weve had some bad American CEOs. What are the probabilities? Fifty-fifty, which is not bad, since hiring a CEO, American or otherwise, is hard. You have to ask whether American CEOs are less successful because they're American or because they're unsuitable for the company. There are no easy solutions. People are people, and if you want to succeed, you need a good CEO, Israeli or American.

Can you characterize an American CEO who would beprone to failure?

An American CEO frequently wants to spend too much money, while Israelis dont, especially these days. Some Americans come from big companies with large teams and subordinates, which is not the style of Israelis or start-ups. Some of them are intolerant of the cultural differences and are inflexible, while flexibility is one of the most important things for a start-up and one of the Israelis best traits. If the American is unsuitablein any of these areas, disaster will ensue. But we have also had success with American CEOs.

I love the food

The reasons behind the failure of the average American CEO in an Israeli company can be understood by examining the success of Gries and Ciporin. They seem to be among the few Americans able to adapt to the inherent hardships of managing an Israeli company. Coincidentally or not, they both have an affinity for the Holy Land. Ciporins connection is seemingly more emotional, as he is half-Jewish, while Gries has lived in Israel and completed military service in the IDF.

Gries joined XACCT in early 1998, after leaving his job as General Manager of the Network and Systems Management Division of Compuware Corporation (Nasdaq: CPWR). He does notbelieve his service in the IDF significantly contributed to his success. You have to be open to cultural differences, which he claims is the key factor. If you grew up in the American Midwest, and your farthest trip was to California, you would have trouble working with people in Tel Aviv, even if you read extensively about them."

We have over ten nationalities working at XACCT, and I have to handle everything. Therefore, the number one rule is to leverage them beyond their cultural differences. We're not French, English, Israeli or American; we're XACCT, and we have the same goal. The second rule is to look for the advantages of each culture and place. This is the first time I've worked with an Israeli company, and I was quite impressed there is no other word for it by the Israeli fighters who are prepared to workhour after hour. They are also very creative. These things are leveraged."

In order to communicate clearly, I speak in language that will be understood. For example, I dont know much about Israeli culture, but I know engineering, and use engineering language to speak with Israeli engineers. It is like understanding stand-up comedy you have to be a part of the place and culture.

In short, communication is the secret ingredient of Griess kitchen. He spends a lot of time on planes visiting XACCTs offices. For example, he is personally presenting the company's 2002 business plan to each branch. Its not like someone get an e-mail saying, Come on, lets kick some ass, says Gries. He knows the resume of all of the employees at every office, educates them to look beyond their cultures, and sends them to visit other foreign offices (Including the frightening visit to Israel, he says).

DealTimes Ciporin is Eisenbergs other example from their portfolio of an American-style success story. Ciporin was plucked to head the e-commerce price comparison company from MasterCard, where he was a vice president. Ciporin explains how he succeeded where so many have failed, I was blessed with several things as the American CEO of an Israeli company. Firstly, I was blessed with two very supportive founders who never damaged my authority in any way. We never disagreed about who makes the decisions. There was no ego problem, and frankly, that's unusual for a companys founders, Israeli or otherwise. Furthermore, I was also blessed with wonderful investors, whose support was amazing. So I enjoy myself.

Arent the time and cultural differences a problem for you?

Ciporen: 5,000 miles is a long way, and from the outset we invested a great deal in setting up communications between Israel and the US. We spent a lot of money on video-conferencing equipment in order to hold regular weekly, sometimes daily, meetings between the American and Israeli teams who work together on a permanent basis. It's vital to communicate above and beyond, otherwise the distance could become a problem. There are differences, and we try to make sure they wont be a hindrance. We travel a lot the Israelis come here, and we travel to Israel.

Are you afraid to come to Israel?

Obviously the situation is difficult. I was in Israel three or four months ago, and when you're in your office in Netanya, everything is fine. I did not feel personally unsafe, and in any case, it wasnt a problem until now.

For his part, Gries does not see the slew of problems mentioned above as affecting his job as an American CEO of an Israeli company. I am quite comfortable. XACCT is an international company. It might have been a problem if I were the only American while everyone else was Israeli, because the leader would have had a different cultural milieu than the rest of the companys employees. In our case, we tried to build a varied organization from the beginning. This is my first time with an Israeli company, and it has been amazing and wonderful. I love it, and I love the food.

Published by Israel's Business Arena on 24 December 2001

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